1900-1949: THE CENTURY STARTS TOUGH ... war, Depression, war

The first 50 years of the 20th Century altered the complexion and the essence of American life. Americans facing each other at either end of this period would barely recognize each other.

In that time we learned to fly. The Wright brothers flew for 120 feet in 1903. Charles Lindbergh heroically stretched the distance to 3,600 miles with his trans-Atlantic flight in 1926. And, by 1947, Air Force test pilot Chuck Yeager coaxed his Bell X-1 rocket plane past the speed of sound. Through 50 years, two World Wars and the Great Depression, America progressed from chain-driven propellers to supersonic jets.

The advances that took place in real estate during that time were not as dramatic as those in aviation, but they were striking. The immigration of workers into the urban areas that started during the Industrial Revolution gained momentum, giving rise to huge urban centers of commerce, culture and government. The modern day downtown was born. The fabulous prosperity and technological advances of the Roaring-20s, combined with enterprising real estate dreamers, made the skyscraper a national symbol and led to the coining of the word "skyline."

Perhaps the most enduring legacy of the time was the financial structure adopted following the Great Depression and its long-term effect on real estate finance. There were, of course, similarities - new property needs, development, speculative rushes, overbuilding. There were periods of great opportunity when capital flowed and fortunes were made, and there were times of despair when bankruptcies and foreclosures were the norm.

The century began on a positive, but cautious note. The economic mood was subdued following the fantastic expansion following the Second Industrial Revolution and the Depression of 1893 that followed. Real estate holdings had lost considerable value during the Depression, and real estate people were tentative. There was very little real estate data gathered, and what information did exist was only examined on the local level. They had no idea of knowing that values were recovering nicely across the nation as the economy strengthened.

1909 marked a turning point in the national economy and real estate activity, especially in urban areas, gained momentum.

Downtowns swell and spill over The early decades of the 20th Century marked the transition of the United States from a rural-based society to one centered on cities. Much of the move to the cities occurred at the end of the previous century with the shift from an agricultural to a manufacturing economy. Manufacturers and industry needed to be close to transportation and that meant moving to the ports and railroad hubs originating in the newly formed urban areas. From 1860 to 1900, the number of urban areas increased fivefold. In 1860 there were only nine American cities with more than 100,000 inhabitants; by 1900 there were 38. The population continued to move closer to jobs in newly formed cities. The steady shift from the country to the city was augmented with a swell of immigration from Europe. In 1900 60% of the population still lived outside of the major urban areas, but by 1920, more than 50% of all Americans resided in cities.

It was in the early decades of the new century that the familiar flow between urban and suburban areas first took place. As population and businesses rushed into cities to live off of each other, land values rose. As values in the inner city rose, residential and warehouse uses were no longer feasible. Improved roadway systems and an extensive railroad network enabled workers to live just beyond the city limits. The nation was experiencing the first migration out of the inner cities to the suburbs.

Of skyscrapers and skylines Nothing since the Industrial Revolution had changed the face of American cities more than the real estate boom of the 1920s. Technological advances and massive industrial expansion spurred a period of unparalleled prosperity for America beginning in 1920. Manufacturing efficiency had increased exponentially with the arrival of power machinery, mass production methods and the electrification of close to 70% of the nation's industry. America's wealth was rising fast.

The era calls up visions of upper-class urbanites doing the jitterbug and smoking expensive cigarettes. The most lasting symbol of the time, however, was the skyscraper.

The skyscraper was not an entirely new concept in the 1920s. Larger and taller buildings had been appearing from the late 19th Century. It was the advanced technology of the early-1900s and the booming economy of the 1920s, however, that incited the riot of skyscraper development that forever changed the complexion of the American city. From 1927 to 1931, roughly 100 buildings higher than 25 stories were built - 30 rose in the peak year of 1929.

Two sets of dynamics set the scene for the great 'scraper boom - tenants' desire for more space and new technology. Businesses, while still relatively small on average, were gaining in size and complexity. Many of the growing industrial companies were now national concerns. The demand for space to house the new wave of administrative workers was skyrocketing. Organizations were increasingly complex. As the organizations grew more complex, management soon appreciated the benefits of locating close to other firms related to their business. The face-to-face nature of business sparked intense demand for space within a relatively small area in the central business districts of cities across the nation. Instead of expanding horizontally, cities grew vertically.

Larger companies also saw the skyscraper as an effective marketing tool. What better way to convey financial strength and prestige than a massive steel frame building with their name on it? Demand for space led to tall buildings; pride, hubris, and the need for a corporate symbol pushed the structures even higher. The Metropolitan Life Insurance Company also sought to use the skyscraper as a declaration of stability, strength, and public service.

One of the earliest and largest examples was the 792-foot, 60-story Woolworth Building completed in 1913 in New York City. Dubbed the "cathedral of commerce," the massive tower showcased the retail empire that stood behind it.

The desire to build larger skyscrapers was not enough to make them a reality, of course. Technology had to catch up with the aspirations of developers and investors. By the early-1900s most of the methods and building technology were available to raise the rooftops to new heights. Steel frame construction - first used in the Home Insurance Building in 1885 - had permanently replaced the heavy mason walls that kept prior structures low to the ground. Indoor plumbing and electric lighting made the structures tenantable to the most discerning users. One crucial piece of technology allowed significantly taller construction - the gearless traction Otis elevator of 1902. The evolution of the elevator from steam powered, to hydraulics to electric enabled tenants to travel at 600 feet per minute and made buildings above 30 stories practicable. (See our sidebar on page 18.)

The need for space and the desire to stay close collided to push buildings skyward. Developers wanting to extract as much value from a fixed-size plot of land weren't about to stand in the way of the tenant desires. A multitude of financier, developer and construction companies positioned themselves to fill the need for corporate America. Most reaped fortunes.

The boom was financed mostly by institutions - insurance companies, newspapers and banks. Not only were they building trophies for their own corporate image, but they were really the only sources of financing that had long term capital to invest.

The skyscraper mania was concentrated in the two most popular cities for commerce - New York City and Chicago. According to the Urban Land Institute (ULI), Detroit, Philadelphia, Pittsburgh, Newark and Seattle all had at least two skyscrapers by the beginning of World War II, but New York and Chicago were the uncontested leaders in the race for skyscraper dominance. Chicago is considered the birthplace of the skyscraper with the construction of the Home Life Building, but it was not long before New York, the money center of the nation, spoke for the majority of tall buildings. In the time leading up to World War II, there were better than 75 structures taller than 25 stories. Part of the reason for New York's dominance in the skyscraper business was its role as thecenter of the nation's capital. In the Roaring-20s the money didn't fall far from the tree. There was also the simple fact that Chicago, like most other cities, had adopted much strict-er zoning and height limits for the structures. New York was the place to be, and rents were almost four times as high as in second place Chicago.

Like flappers at a speakeasy, the economy partied on. The renowned Florida Land Bust of 1926 had put the real estate industry changed the mood to some extent. The industry was on guard for markets that were beginning to show some signs of softening, and development in many markets began to wind down from their peaks. But development tends to wind down slowly. This was certainly the case in the major urban areas where construction would not slow for some time. Some of the tallest buildings of the boom - including the Empire State Building - were still under construction when the Great Depression began in 1929.

The Great Depression The economic crisis of the 1930s is often tied to the 1929 stock market crash. The crash serves as a useful historical marker, but there were other underlying causes of the most severe depression in our history. The most agreed upon reasons include: acute overcapacity, or overproduction of goods; restrictive tariff and war-debt policies adopted following World War I that limited foreign markets for American goods; easy money policies that led to soaring levels of credit; and runaway speculation in the stock market. At the depth of the Great Depression in 1933, 16 million people - one third of the labor force - were unemployed.

Real estate development, though slowing some, remained active well into late 1920s - especially for downtown office projects and apartment markets across the nation. The October 29, 1929 stock market crash marked the beginning of the Great Depression, but the market crash did not coincide with the collapse of real estate markets. It was only a matter of time, however, before the fallout from the stock market collapse drastically effected the rest of the economy. As the national economic engine lost traction by the early 1930s, defaults on mortgages grew and then becamethe norm. Banks tried to maintain liquidity by shutting down their loan programs. Real estate lending to buy, develop, or refinance properties disappeared. Renters were unable to pay rent and investors were left sitting on their hands despite steep discounts. The Depression eventually froze the real estate markets solid.

The Great Depression had a profound impact on the financial system. Having a third of the workforce jobless can have that effect. The broader reorganization of the financial system included addressing the pressing needs of the real estate industry. The federal government had recognized the importance of the real estate market during the Depression. It was obvious that for the economy to find its way out of the Depression, real estate would have to play a large part.

Towards debt-driven financing In the early years of the real estate industry, the demand for financing was not fully met. Real estate is an expensive commodity and the need for debt instruments of some sort was always necessary. Thrifts and savings and loan institutions financed much of the residential market, and life insurance companies and commercial banks provided funds for the majority of commercial projects. There were, however, several characteristics of the pre-1930 real estate finance market that significantly restricted investors and consumers of real property.

The structure and terms of the average real estate loan were vastly different from the diverse forms of financing the industry enjoys today. Without mortgage insurance and uniform underwriting practices the risk for real estate lenders was much higher. Since the perceived risk for extending loans for real estate was higher, institutions required higher equity positions from investors and homeowners. Loan-to-value financing of between 40% and 60% was the norm. This alone helped limit the vast majority of investing to wealthy individuals and institutions.

Part of the real estate risk perceived by lenders was very real. Economic cycles fluctuated wildly in the pre-1930s era due to the nature of monetary policy and the reliance on the gold standard. More volatile economic cycles had the effect of drastically shortening real estate loan terms. In addition to economic-cycle risk, commercial banks relied heavily on short-term deposits for funds. This shortened the typical loan term further.

One of the most surprising aspects of real estate finance (especially for residential property) was that debt was usually not amortized. It was generally accepted that the value of real estate could go nowhere but up. Since the most important consideration for the loan was the value of the real estate, borrowers were under no pressure to cover payments of principal. Principal was almost never paid down, let alone paid off. Most loans were interest-only with large balloon payments at the end of the short term. When the term ended, borrowers banked on the ability to refinance with a similar loan, and in effect, generally never held true title to the collateral.

The effects of these trends were substantial. The conventional nature of loans kept potential investors from entering the market. The absence of insurance and various government subsidy programs kept lending and borrowing risks high shrinking the universe of investors further.

The significant equity requirements produced another trend - an abundance of second mortgages. To invest in property or to buy a house, many borrowers relied heavily on junior financing. By the mid-1920s, junior debt levels were raising flags to much of the lending community. Many called the non-amortizing, high-interest loans "pitfalls to be avoided, or at least not extended."

When values dropped below debt levels during the Great Depression, the assumption of increasing real estate values and the interest only nature of many loans placed an enormous burden on the banking system. Hundreds of banks failed, just as many mills and factories were shuttered, and more than 10 million people were out of a job by 1932.

Franklin D. Roosevelt's New Deal policies promised to end the economic depression and to stabilize the national economy to prevent such crises in the future. Some of the efforts of the federal government with regard to real estate shaped the financial methods and instruments used today. Recognizing that the real estate industry needed a more secure financial base, the federal government stepped in.

One of the earlier efforts to bolster the private residential markets was the establishment of the Federal Housing Administration (FHA). The FHA was established in 1930 and provided mortgage insurance. This lowered the risk of lending on real estate. With lower risks, the terms lengthened to 20 to 25 years, interest rates gradually fell, and loans were more fully amortized over the life of the loan.

The savings and loans were one of the primary lenders for residential real estate at the time. One of the major downfalls of the system was that these institutions were all very local in nature. This limited their effectiveness in supplying the market with capital and created intense periods of disequilibrium. The government had realized the need for a lender of last resort for commercial banks and formed the Federal Reserve, but there was no central bank for the savings and loans. In 1932, the Federal Home Loan Bank System (FHLB) was created. Under the system Federal Home Loan Banks supervised and regulated local banks. This gave each local bank the ability to transfer funds amongst each other in times of low liquidity and lowered the chances of panicked withdrawals. With the FHLB behind them, cash-strapped banks were also able to obtain advances so the demand for financing was met.

Another government-sponsored entity formed in the 1930s following the Great Depression is still an integral part of today's financial system. The Federal National Mortgage Association (FNMA) was incorporated in 1938 to provide a secondary mortgage market and attract investment capital into the mortgage market from outside the real estate industry. As recent history suggests, Fannie Mae has been effective in keeping funds flowing into the residential market when other capital sources dry up.

As the nation felt its way out of the Depression, the real estate market improved. They would only recover for so long, though. America was about to enter another trying chapter in its history - World War II. Except for housing and industrial property required for the war effort, most new private construction was put on hold during war-time years. Prices and rent control, the millions of men overseas and postponed marriages all lowered demand for real estate.

During the war, national decisions formed the vast majority of the real estate industry's actions. The morning after the attack on Pearl Harbor, the National Association of Real Estate Boards wired President Franklin D. Roosevelt stating, "The Realtors of America pledge their full support to you and the government in the defense of the country against the aggressions of Japan, Italy, Germany, or any other country. We stand at your command."

The migration of huge masses of workers to defense-related factories created housing shortages. Real estate boards helped organize development efforts and lobbied for legislation extending FHA support for defense housing. The Society of Industrial Realtors (now the Society of Industrial and Office Realtors) helped with the challenges of plant location, and eventually played a large part in the reversion of those plants to peacetime uses.

When the war ended, the United States faced the challenge of converting back to a peacetime economy. Returning servicemen wanted to marry and settle down. The country had just come to the end of an unbelievable stretch of history. Those born at the turn of the century had endured two horrific world wars and a dispiriting economic depression. It is no wonder that the 1950s were such culturally conservative years.